Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 17

An analyst for FoodMax estimates that the demand for its Brand X potato chips is given by ln
and P X are the respective quantity and price of a four-ounce bag of Brand X potato chips, P Y is the price of a six-ounce bag sold by its only competitor, and A X is FoodMax's level of advertising on Brand X potato chips. Last year, FoodMax sold 7 million bags of Brand X chips and spent $0.42 million on advertising. Its plant lease is $2.1 million (this annual contract includes utilities) and its depreciation charge for capital equipment was $2.8 million; payments to employees (all of whom earn annual salaries) were $0.8 million. The only other costs associated with manufacturing and distributing Brand X chips are the costs of raw potatoes, peanut oil, and bags; last year FoodMax spent $2.8 million on these items, which were purchased in competitive input markets. Based on this information, what is the profit-maximizing price for a bag of Brand X potato chips?